On Tuesday, in thinly-traded markets due to the holiday season, the dollar struggled to stabilize, influenced by indications of easing inflation in the largest global economy. This easing inflation trend is anticipated to provide the Federal Reserve with flexibility to consider interest rate reductions in the coming year.

Simultaneously, the yen maintained its position close to a recent five-month high, driven by expectations that the Bank of Japan (BOJ) may soon signal the conclusion of its ultra-easy monetary policy. Throughout 2022 and 2023, this policy had exerted downward pressure on the Japanese currency, contrasting with the more assertive rate-hike paths adopted by major central banks globally, as reported by Reuters.

Given the public holiday for Boxing Day in Australia, New Zealand, and Hong Kong, currency movements remained subdued in the post-Christmas session.

In trading against the greenback, the euro experienced a marginal decline of 0.06% to $1.1019 but remained in proximity to its over four-month peak of $1.1040 achieved last week. Sterling held steady at $1.2701, while the Australian and New Zealand dollars hovered near their recent five-month highs.

The dollar index lingered near a five-month low of 101.42, recorded last week, and was last observed at 101.65.

Recent data, released on Friday, revealed a decline in U.S. prices in November, marking the first such occurrence in over 3-1/2 years. This development pushed the annual inflation rate further below 3%, heightening market expectations of a Federal Reserve interest rate cut in March next year.

These findings emerged a week after Fed policymakers indicated the possibility of rate cuts in 2024 during the central bank's final policy meeting of the year, contributing to the downward pressure on the dollar.